The U.S. logistics warehouse system will experience relatively modest upticks in vacancy rates through the balance of the year and into 2023 as demand cools and supply chain bottlenecks ease, allowing more capacity to come online, the research unit of Prologis Inc. said Thursday.
In a report that mostly focused on second-quarter activity, Prologis (NYSE: PLD) said vacancy rates, which remained at an all-time nationwide low of 3.1% in the quarter, are expected to rise to 3.2% by the end of 2022 and climb to 3.7% by the end of 2023. Project deliveries should catch up with demand by the end of 2022, and users should have more leasing leverage over the next 18 months as deliveries begin to exceed demand, the report said.
Demand is expected to level off as macro uncertainty and higher borrowing costs prompt warehouse users to “slow the pace” of their decision-making, it said. Still, rent growth will continue to outpace elevated levels of inflation. Depending on the market, users will find opportunities scarcer than those that existed prior to the pandemic.
Rents in the first half of the year rose 16% as demand remained strong and developers needed to seek higher rents to offset materials inflation, shortages of land and labor, and supply chain disruptions, the report said. Only 73 million square feet was delivered as continued supply chain bottlenecks kept supply stuck in the pipeline. Capacity utilization rose to 85.6%, levels that indicate no excess space within facilities, as higher retail sales and restocking efforts boosted activity.
Prologis estimated that 800 million additional square feet of space will be needed to accommodate current growth and to support future replenishment efforts. To put that number in perspective, Prologis, the largest developer and operator of logistics real estate, controls more than 1 billion square feet across its 19-country network.
On a net basis, wholesale and retail inventories have risen by 7% in the past six months alone, the report said. As a result of current and future replenishment efforts, the report forecasts the ratio of inventory to sales to stabilize at levels 5% to 10% higher than what existed before the pandemic.
Though inventory levels have risen, business sentiment indicates that they remain too low to satisfy warehouse users, the report found.